The Preeminent Choice of Law for Businesses Around the World
In addition to the dictates of US federal law, every business organization must be formed under the laws of an individual state. More than one million corporations and alternative entities, including over 66% of US Fortune 500 companies, have elected to be governed by Delaware law. This is despite the fact that many of those entities have no active operations in Delaware and maintain their principal place of business in a different state.
Delaware’s dominance as the business jurisdiction of choice in the US is a result of the unique combination of the following factors: (i) a knowledgeable legislature committed to keeping Delaware at the forefront of business law; (ii) a close relationship between the legislature and the state Bar; (iii) an efficient and user-friendly Secretary of State office; (iv) a high quality court system; and (v) a well-established and expansive body of judicial precedent.
For these reasons, it is not surprising that many corporate and commercial transactions include Delaware entities. Similarly, Delaware law is frequently chosen by non-Delaware contracting parties to govern their agreements in both multistate and international transactions.
The Delaware Market
Delaware’s flexible business statutes and sophisticated judicial precedent make Delaware law distinct from both US federal law and the law of all other states.
In transactional matters, Delaware-licensed attorneys are relied upon to provide advice on issues of Delaware law relating not only to the applicable business statutes, but also to the continuously evolving judicial decisions interpreting them and Delaware’s expansive contract law.(FOOTNOTE ONE) Delaware transactional attorneys are responsible for ensuring that each aspect of a transaction governed by Delaware law complies with each of the above.
In litigation matters relating to a Delaware entity or a Delaware-governed agreement, a Delaware attorney may be selected to serve as lead counsel. If chosen as lead counsel, the Delaware attorney manages the case and has an active role in advocating on behalf of the client in court proceedings. If not serving as lead counsel, the Delaware attorney generally does not actively advocate on behalf of the client, but remains responsible to the court for the positions taken by lead counsel, the presentation of the case and the conduct of the litigation. In order for a non-Delaware attorney to advocate their client’s position in Delaware, a Delaware attorney must file a written motion with the court requesting the non-Delaware attorney be admitted pro hac vice. If granted, this motion will permit the non-Delaware attorney to practice law in the state on a temporary basis.(FOOTNOTE TWO)
Delaware’s Business Entity Statutes
The Delaware General Corporation Law (DGCL) has acted as the centerpiece of Delaware’s corporate success. The DGCL is an enabling statute that offers maximum flexibility to corporations and their shareholders by permitting corporations to choose their own set of company-specific procedures, while simultaneously providing a sufficient number of mandatory provisions for the protection of investors. Each year, the Delaware legislature, with the advice of the Council of the Corporation Law Section of the Delaware State Bar Association (the Council), updates the DGCL to reflect the most recent changes in corporate law. The Council, comprised of many of the top business attorneys in Delaware, drafts proposed amendments to the DGCL and submits them to the legislature for review and approval. This process ensures that the DGCL provides a current, balanced and flexible set of laws for all corporations to consult.(FOOTNOTE THREE)
Like the DGCL, the legislature, with the help of the Council and its committees, amends the Delaware Limited Liability Company Act and the Delaware Revised Uniform Limited Partnership Act (the Acts) annually to address new issues as they arise. Although the Acts were enacted based on the same principles as the DGCL, they more heavily focus on the principles of “freedom of contract” and private ordering. As a result, the Acts provide for ultimate flexibility in the organization of a company’s business affairs and allow members and partners to mold the business enterprise to fit their vision.
The Delaware Court System and its Extensive Case Law
Delaware’s continued success as a leader in the development of business entities can be primarily attributed to the state’s world-renowned judicial system and the expert judges tasked with interpreting the state’s business statutes. Delaware’s reputation for expertise in the area of business law can be credited in particular to the Delaware Court of Chancery and the Delaware Supreme Court.
a. The Delaware Court of Chancery
The Court of Chancery is a specialized court of equity that maintains specific jurisdiction over most business law disputes and is considered by many to be the nation’s preeminent business court. Unlike other state courts, there are no jury trials in the Court of Chancery. Instead, the court consists of five judges (one Chancellor and four Vice-Chancellors), who are appointed based on their experience and sophistication in the field of business law. Originating in 1792, the Court of Chancery has developed a significant body of reasoned precedent that provides substantive guidance to corporations and their shareholders, as well as to alternative entities and their members.
b. The Delaware Supreme Court
A ruling from the Court of Chancery may be appealed directly to the Delaware Supreme Court, which acts as the final authority on all business and commercial law issues. The Supreme Court consists of five Justices who have significant experience and expertise in Delaware business law. The Supreme Court often sits en banc; ie with all five Justices, when hearing important business disputes, and will expedite a corporate case for the benefit of the parties when the dispute demands a real-time answer in order to avoid injustice.
Delaware’s flexible business statutes, well-developed case law, sophisticated court system and efficient Secretary of State Office continue to make it the preeminent choice of jurisdiction for incorporation and adjudication in the United States. In order to fully take advantage of these unique Delaware features, Delaware counsel should be consulted.
1. Delaware attorneys may be retained as outside counsel directly by in-house counsel, a non-US law firm or a US law firm that does not have attorneys licensed in Delaware.
2. In order to practice law in Delaware, an attorney must pass the Delaware Bar exam and complete a five-month clerkship in Delaware. Delaware does not have reciprocity of any kind with any other state. Thus, even an attorney who has passed the Bar exams of three other states and has practiced law for 30 years cannot waive into the Delaware Bar.
3. For example, Section 102(f) of the DGCL was added in 2015 to prohibit Delaware corporations from enacting fee-shifting bylaws that would render a shareholder responsible for the corporation’s legal fees if the shareholder filed an “internal corporate claim” and lost. An internal corporate claim is a claim based upon a violation of an officer’s, director’s or stockholder’s duty or as to which the DGCL confers jurisdiction on the Court of Chancery.